Reduce Craftsman Automation Ltd for the Target Rs 12,400 by Emkay Global Financial Services Ltd
Craftsman (CAL) logged a robust 2Q, with consolidated revenue up 47% yoy (12% beat on our estimate). Consolidated EBITDA grew 30% yoy (4% below our estimates, due to margin pressure). Consolidated EBITDAM declined by ~250bps sequentially (~220bps lower than our estimates). CAL remains on a strong growth trajectory, with ~15% medium-term CAGR, with 2H revenue expected to exceed 1H levels, led by strong growth momentum in the aluminum products segment, supported by strategic investments over the past few years. The powertrain segment is also expected to sustain growth across segments, barring tractors, where growth may contract in 2H. Sunbeam is exiting the lowmargin business, primarily with the smaller customers, including some lossmaking accounts, to improve profitability. CAL remains on track to achieve $100mnpa stationary engine revenue target by FY30, with FY28/FY29 expected to reach ~30/50% of the target run-rate, supported by a strong order book. Commodity inflation along with rising manpower and energy cost remain a key headwind, with a marginal impact expected in 3Q and no incremental impact in 4Q. Aluminum price corrections are under negotiation with customers and are expected to materialize over the next 2 quarters. We believe CAL is under a strong growth phase, supported by monetizing of past investments and a diversifying revenue base. We largely maintain FY28E/FY29E EPS and raise our TP by ~4% to Rs12,400 from Rs11,900 based on 16x Sep-28 EV/EBITDA
Strong topline; margin pressure persists on aluminum costs
Consol revenue rose 47% yoy to Rs29.5bn, led by 39/51/46% growth in PT/AP/I&E. Consol EBITDA came in at Rs3.9bn (up 30% yoy), with EBITDAM narrowing by ~250bps qoq to 13.3%, as gross margin fell on higher aluminum inventory cost partly offset by lower employee and other costs. Consol PAT was up 68% yoy at Rs1.5bn.
Earnings call KTAs
1) Management reiterated its 15% real-term CAGR growth guidance, with 2H revenue and EBITDA expected to exceed 1H levels. Gross profit growth of ~30% yoy is expected to sustain over the next 2–3 quarters.
2) Aluminium margins should recover in 2H, supported by customer price corrections and operating leverage. 2Q bore the brunt of inventory-related losses, with minimal impact expected in 3Q and none in 4Q.
3) Powertrain growth remains healthy, though tractors may contract over the next two quarters. New aluminium plants require ~2 more quarters to achieve profitability.
4) Sunbeam’s profitability should improve as low-margin, EBITDA-negative businesses are being phased out, despite near-term revenue moderation.
5) CAL remains on track to achieve $100mnpa stationary engine revenue target by FY30, with FY28/FY29 expected to reach ~30/50% of the target run-rate, supported by a strong order book.
6) Pricing actions are critical amid rising manpower, energy, and capital goods costs; legacy product price resets of 6–20% of value addition/gross margin are under discussion.
7) Capex intensity is moderating with 3Q capex guided at Rs5-6bn and minimal in 4Q vs ~Rs11bn in 1H.
8) Net debt/EBITDA guided at 1.7-1.8x for FY27.
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